Kallas Remarks: Fred Wilpon Fires Back

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TRUSTEE AMENDS COMPLAINT IN MADOFF/METS CASE; STERLING (WILPON/KATZ) FIRES BACK WITH BOTH BARRELS

Many have been waiting for the Sterling defendants (Fred Wilpon, Saul Katz and others), in the Trustee’s $1 billion lawsuit against them, to respond with some legal claims rather than just statements to the public (in the world we live in, in 2011, such public statements are, indeed, often necessary to fight the battle in the court of public opinion). After Trustee Irving Picard filed an amended complaint on Friday, which “provides additional specific detail and quantification of the alleged fraudulent transfers from [Bernard Madoff Securities] received by the Sterling Defendants” (according to the trustee’s press release), the Sterling defendants filed their own motion (and issued their own press release) on Sunday contesting the entire amended complaint.

WHAT DOES THE AMENDMENT TO THE COMPLAINT DO WITH RESPECT TO THE LAWSUIT?

Well, the amended complaint fills in a number of holes with respect to the exact amounts that the trustee is looking to recover. For example, rather than a numberless “amount in principal subject to discovery and proof at trial,” the amended complaint seeks “over $700,000,000 in principal.” Indeed, later in the complaint, the trustee sets the number (in addition to the approximately $300,000,000 in “fictitious profits”) at $710,601,377 in principal, now (officially) over $1 billion.

The amended complaint also lays out further allegations that attempt to support the notion that the Sterling defendants “knew or should have known” about the Madoff Ponzi scheme that fooled thousands of investors, sophisticated and not-sophisticated, as well as the Securities and Exchange Commission. Some may help the trustee (a $54 million dollar interest-free loan by Madoff to Sterling was documented by a one-page letter describing the loan as an investment by Ruth Madoff in SNY; the money was apparently returned to Madoff the next day); others may not (after revelation of Madoff’s fraud, the Sterling partners had to negotiate with banks to restructure more than half a billion dollars in collective debt; one would think that, as a matter of course, when the Sterling defendants found out that their $500,000,000 in Madoff accounts was zero, they would have to restructure with the banks – what else were they going to do?).

Interestingly, to this writer, the additional $700,000,000 claim for principal in the amended complaint is the number going back only six years from the date of the bankruptcy, not back to the 1980s, as the original complaint seemed to request. It’s not clear if the trustee has backed off claims from six years before the bankruptcy to the original date of investments by the Sterlings (dating back decades) but, at least, this seems to be more in line with the general maximum look-back period of six years in a New York bankruptcy that has been discussed in previous columns. Obviously, however, if the $700,000,000 million in principal was within six years of the bankruptcy filing, that is a gigantic number for that time frame that will be hotly contested by the Sterling defendants and their lawyers.

WHAT MOTION(S) ARE THE STERLING DEFENDANTS MAKING?

The Sterling defendants have filed a motion in bankruptcy court in the Southern District of New York to dismiss the complaint or, in the alternative, for summary judgment. Indeed, the lawyers for Wilpon/Katz and others, Davis, Polk and Wardwell, a top-notch law firm, have filed a 94-page legal brief in support of their motion. What the Sterling defendants are asking Judge Burton Lifland to do is either dismiss the complaint in its entirety or, in the alternative, grant the Sterling defendants judgment for them without a trial.

The brief is well-written and contains a lot of interesting evidence and law to counteract what the trustee has alleged. It includes specific responses to 14 “fictions” set forth by the trustee in the amended complaint. For flavor, here’s one: In response to the trustee’s assertion that Sterling Stamos (an investment entity in which Wilpon and Katz invested) advised the Sterling defendants not to invest with Madoff, the brief lists some actual testimony from Peter Stamos (the Stamos in Sterling Stamos) that seems pretty convincing that he never told Wilpon and/or Katz anything other than, as a general investment principle, the Sterling defendants should not have more than 10% of their money with any single investment house (including Madoff). Indeed, Peter Stamos testified that he told Saul Katz that Bernard Madoff was “among the most honest and honorable men that we will ever meet” and that he was “legendary to all of us.”

Wow! We will have to see if the trustee has some testimony from someone at Sterling Stamos other than Peter Stamos because he clearly wasn’t the one who told Saul Katz or anyone else that Madoff was a bad guy or running a scam.

WHY IS THIS MOTION BEING MADE NOW?

In response to a complaint (or, in this case, an amended complaint), the Sterling defendants have the right to either make a motion or answer the complaint. Not surprisingly, they are trying to have the lawsuit (or, at least, parts of it) dismissed. In addition, in the alternative, they are asking the judge to grant them summary judgment (that is, they win without a trial).

ARE THE STERLING DEFENDANTS SWINGING FOR THE FENCES?

You bet they are. Actually, they are trying to hit two home runs. The first is in the Second Circuit Court of Appeals, where they (and others in their position, that is, “net winners”) have argued that the trustee has to count the $500,000,000 (which was actually $0 because of the Ponzi scheme) that was in their account when the fraud was discovered and the bankruptcy was filed in New York. As discussed previously (see Kallas Remarks, 3/7/11), this seems to be a longshot.

Now, they are trying to hit another home run. While a number of excellent points are made in the brief for the Sterling defendants, this may also be a longshot. It’s hard to believe that a federal bankruptcy judge will dismiss in its entirety (or grant summary judgment with respect to) a 381-page complaint filed by a well-respected trustee (who was appointed by the judge, by the way) with the track record of Irving Picard. Having said that, we will have to wait and see how the trustee responds to this motion.

WHAT HAPPENS NEXT?

The trustee will now have time to respond to the 94-page brief submitted to the court by the Sterling defendants. After that, the Sterling defendants will file a reply brief in response to the trustee’s brief. Then, Judge Lifland may hear oral argument on the motion before rendering a decision on the motion.

In the meantime, Mario Cuomo is apparently still attempting to mediate a settlement between the trustee and the Wilpon/Katz group. As we have discussed at length, while over 90% or so of these cases settle, this may be the exception. The trustee’s price seems to be going up, while the Sterling defendants insist they have done nothing wrong and, essentially, owe nothing. While I had previously suggested, based on the original complaint, a settlement sum in the neighborhood of $240,000,000 (see Kallas Remarks, 2/22/11), it’s unclear whether there have been any initial offers on either side. Right now, it still looks like a very difficult case to settle.

Stay tuned.

What are your thoughts on the 14 “fictions” outlined by the Sterling defendants? Let us know in the comments below…